Chapter 13 provides some very unusual protection. It doesn’t just protect you and your possessions. It can protect your co-signers and their assets from debts they co-signed with you, even without them filing bankruptcy.
The “automatic stay” is the provision in the Bankruptcy Code which stops all collection activity by all your creditors against you—the person filing the bankruptcy case. The “automatic stay” applies to all the chapters of bankruptcy, including to both Chapter 7 and 13 for consumers. This provision is found at Section 362 of the Code.
But while the “automatic stay” applies to Chapter 13, there is another provision—Section 1301—which only applies to cases filed under Chapter 13.
Section 1301 says that once a Chapter 13 case is filed, “a creditor may not act, or commence or continue any civil action, to collect all or any part of a consumer debt of the debtor from any other individual that is liable on such debt with the debtor.” (Emphasis added.)
What this language means is that your Chapter 13 filing does not just stop a consumer creditor from collecting on a debt directly from you the debtor, the creditor is also stopped from collecting on that same debt from anybody else who co-signed with you or owes on that debt for some other reason.
That’s quite unusual. Through this “co-debtor stay” you can protect somebody, if you want to—especially if it’s somebody important to you—often even without that person knowing that you’re doing so.
This extra protection does come with some important conditions that you need to discuss carefully with your attorney:
1. It does not apply to business debts, only to “consumer debts” (those “incurred by an individual primarily for a personal, family, or household purpose”). This is important because certain kinds of business loan creditors—such as on commercial leases—often try to get you to provide co-signers, including a spouse not involved in the business.
2. The “co-debtor stay” does not apply to income tax debts, because they are not considered “consumer debts” for this purpose. So no co-debtor protection extends to spouses on jointly filed tax returns or to business partners or other co-owners with whom you are jointly liable on a tax debt.
3. This protection has its limitations because creditors can ask for and get permission to pursue the otherwise protected co-debtor under the following circumstances:
(a) IF the co-debtor (NOT the person filing bankruptcy) received the benefit of the loan or whatever “consideration” was provided by the creditor: Simply put, if you co-signed for the other person, who then received the borrowed money or whatever was being purchased on credit—NOT the other way around—then the creditor can get permission to chase that person after all.
(b) IF the Chapter 13 plan “proposes not to pay such claim.” This is the admittedly major catch to this co-debtor stay. You ultimately protect your co-signer ONLY if you are willing to pay the debt in full through your Chapter 13 plan. In some cases, such as a fully secured vehicle loan, you would likely be doing that anyway—you just get extra protection for your co-signer in the meantime. But in other situations it may mean paying on a debt in your Chapter 13 case that you would not otherwise, or paying more on a debt than you would otherwise. But even then, sometimes you are allowed to pay that much less to your other creditors. Again, this is an area to discuss carefully with your attorney.
4. This co-debtor stay lasts only so long as your Chapter 13 case does. It expires as soon as your case is completed, or if and when it’s dismissed (if you don’t make the plan payments), or converted into a Chapter 7 case. In the situation where you’ve paid off the entire debt, this is not a problem. But if you didn’t pay the co-signed debt in full, and the creditor has held off chasing your co-signer during your case because the creditor didn’t want to bother asking the bankruptcy court for permission to do so, your co-signer may well be hearing from the creditor 3-to-5 years after you started your Chapter 13 case. You may or may not care, depending on your relationship with your co-signer, which may change during those years—spouses can turn into ex-spouses, relatives can die or become “judgment-proof.”
There are more things to weigh than you might expect in deciding between Chapter 7 and 13, including the advantage of the co-debtor stay. If you want to protect a co-signer from the consequences of your bankruptcy case, that may well encourage you to file a Chapter 13 case.